The Party Still Rocks

During last years Top 20, Dataquest called the rapid strides made by
domestic IT services as signs of the industrys ultimate democratization. In
FY 08, the Indian democracy itself might have been in doldrums, but the
democratization principles set in motion in IT services continued rolling
smoothly. True there were bumps on the road (fluctuating dollar rupee relation,
the whiff of a US slowdown, oil prices and the alarming rate of rising
inflation); the IT services juggernaut had to apply a temporary third gear, but
there was no question of pulling the brakes or going on a complete reverse.

What this translates into in rupee terms was that the domestic services
market grew by 28% to reach Rs 26,756 crore, up from Rs 20,948 crore a year
earlier. Though there was a two point drop in growth (it was 30% the year
before), probably most industries would have been thrilled to record anywhere
close to 28% growth in a challenging fiscal like 2007-08. The domestic services
market that like a coy bride used to shy away from suitors a few years back,
seemed to have finally lost all its inhibitions and courted all and sundry
irrespective of time and place.

The burgeoning domestic services market made good sense for its constituents
too. The principles of democratization seem to have seeped in deep here, with
the 80-20 rule not applicable in a straightforward way. Unlike most sectors
where the top 10-15 players often contribute the maximum, the top 15 services
players here only contributed 29% of the market (at Rs 7,834 crore), though it
must be admitted that they bagged most of the lucrative contracts.

However, one significant event of FY 08 was the coming of age of a set of
tier-2 system integrators and solution providers. These were primarily the
erstwhile distributors and box-pushers who transformed themselves into their new
avatars. The top 15 tier-2 players together contributed Rs 2,711 crore,
constituting more than 10% of the total market. Two main reasons could be
attributed to the rise of this category: the burgeoning population of SMBs meant
that market forces demanded the emergence of smaller service providers to
address their needs. Secondly, in many cases, the tier-1 players partnered these
smaller players to help in some aspects of delivery. As more and more
organizations looked at outsourcing to multiple vendors, this trend is likely to
rise further.

IBM bagged the Vodafone, Idea Cellular and Indira Gandhi International
Airport, Delhi (IGI) accounts in FY 08. HP bagged United Bank and Britannia.
TCS got the Department of Company Affairs and the passport processing deal from
the Ministry of External affairs. All these deals spelled the growing importance
of domestic IT outsourcing for Indian companies. The domestic IT services market
in India finally seemed to have emerged from the shadow of the IT services
exports sector.

For the second year running, the IT services market clocked a healthy growth rate, making it one of the principal catalysts for Indian ITs domestic success story. Interestingly, it now constitutes close to 1% of Indias GDP. Truly, its one rocking story of the year

While the total domestic IT services market was pegged at nearly $6.5bn, the
IT outsourcing (primarily, business transformation) market itself grew between
22-24% to $3.3 bn in FY 08. IBM again cornered a lions share of this market in
the face of strong competition from other players. Since March 2007, IBM
announced several such services dealsboth large and smallincluding one with
Idea Cellular valued at $600-800 mn, a $45 mn deal with the Central Board of
Direct Taxes, a project with the Delhi International Airport and many more.

Analyzing the Transformation

The IT services market responded positively for most vendors during FY 08
and was largely responsible for making the domestic share of the Indian IT pie
bigger than exports in more than a decade. Initially, it was large enterprises
in BFSI and telecom that went in for long-term outsourcing projects. That has
changed over time (not that it meant these verticals stopped outsourcing in
2007-08) and the market has expanded to other verticals in India like
government, manufacturing, retail, and FMCG.

While most of the spending on IT was initially restricted to large
corporations (and the local arms of global MNCs), the last couple of years have
seen strong investment from the SME market. There were many big-ticket deals
that were announced in 2007-08 and industry watchers and analysts believe that
this is just the beginning. There will be heavy investment in the government
sector, since the defense sector alone is expected to spend around $500 mn on
communication and technology needs, including the national e-governance project
(NeGP).

The emergence of end-to-end operators in the IT services space and the
growing confidence in outsourcing to service providers, led to businesses
awarding more contracts with long-term commitments to specialist firms. There
was a definite change in the mindset of even the PSUs or government verticals in
going for similar business transformation deals where the specialist provider
can take up the complete headache of managing their IT infrastructure
end-to-end.

The Indian market is moving toward an era of outsourcing services in the
domestic space at a faster rate. So far, the domestic market has been dominated
by plain-vanilla support services such as software and hardware deployment, and
includes revenue streams such as AMC. Though this is expected to continue, but
it has started happening with a differenceservice providers and customers are
working together as partners. Result: there is an increasing proportion of
outcome-based deals.

Another important trend noticed in FY 08 that could be a harbinger of the
changing market was that mega deals gave way to mega-relationships. Large
billion-dollar, multi-year transactions were being divided up among many vendors
and also those customers that preferred to sign up service providers in limited
two-three year relationships. The market started moving from Total Contract
Value (TCV) to annualized billing.

Instead of some six to eight large service providers who have dominated the
IT outsourcing market in the past, the number of vendors went up in 2008 as many
smaller tier-2 players entered this specialized service space. Players like
Accel Frontline tied up with the likes of IBM to be part of some large deals.
This change was due to the fact that some pure-play outfits coming out of India
are becoming hybrid players, complementing and competing with traditional
players.

The domestic market is embracing a Western trend in a big way. IT outsourcing
is no longer a postscript for companies that want to cut costs and avoid the
overheads of managing technology. It is no longer going to be driven by
guesstimates. Business models today are no longer in a flux. Differentiation
comes from the integration of technology into the core elements of a business.

Some of the key drivers for IT outsourcing included high attrition rates in
IT departments, lack of in-house availability of expertise on new technologies,
and cost advantage to vendors. Networks are becoming far more integrated into an
enterprises computing architecture, but most IT organizations lack the depth of
knowledge to deal with this area. This has led many CIOs to look at stronger
alternatives to leverage their IT decision making.

The process of business transfor-mationoutsourcing process and
technologyprovide a competitive edge for business at large. It also ensures
innovation and drives the agenda in this on-demand era. Domestic players have
realized that outsourcing their IT applications enables them to not only focus
on their core business activity but also ensures that managed services providers
have skilled and qualified professionals to manage their IT infrastructure at
all levels.

Although long-term relationships were forming too, customers expected
flexibility more as far as the contract model was concerned. The flexible
contract model is based on business needs or satisfaction levels with an IT
service vendor. The customer can scale up further or exit from the project
contract without being penalized. At present, every project comes with an exit
penalty.

Businesses are realizing that it makes sense for organizations to outsource
IT to managed service vendors who can bring in technology, expertise, systems
and processes to improve overall service levels being delivered to the business.
Outsourcing has been helping CIOs to be free from operational hassles allowing
them to focus on strategy and understanding business needs. It has improved
employee productivity and, of course, has brought cost advantages too for many
domestic players.

Dossier of the Kingpins

IBM further consolidated its leadership position in the domestic IT services
arena. Telecom has been IBMs long time favorite and FY 08 was no different.
After pioneering total IT outsourcing with telcos like Bharti and Idea earlier,
IBM also brought Vodafone and BSNL into its fold. The five-year Vodafone Essar
deal, estimated at around $600mn supports the rollout of its wireless network as
well as management of IT services including development and maintenance of key
applications such as billing, BI, financial systems as well as data center
operations. IBM also inked an SOA deal with BSNL for its broadband services
business.

Government was another sector where IBM enjoyed significant success. It won a
$45 mn five-year contract to modernize Central Board of Direct Taxes (CBDTs) IT
infrastructure. As per the agreement, IBM is offering integrated infrastructure
solutions to CBDTs three data centers in Delhi, Mumbai and Chennai and
facilitating management services for the Income-tax department across 745
offices in 510 cities. The CBDT deal was followed by IBM bagging major contacts
from Indian Railways and Ministry of Social Welfare.

The domestic BPO story was even more spectacular than IT services. However, the industry was still restricted mainly to voice-based services. Revenues soared by 65%, thanks to the call centers of large banks like ICICI and SBI as well as telcos like Reliance and BSNL. TCS, Bharat BPO, Aegis, Intelenet, Mphasis and HTMT Global were some other third party domestic players.

Though IBM retained its #1 slot, the big story on the domestic front during
FY 08 was Wipro. There was a decisive shift from being a technology integrator
to being a strategic IT outsourcing partner: the highlights of the year included
two total outsourcing deals, one with Aircel and the other with the Future
Group. The nine-year $600 mn Aircel deal involved transformational outsourcing
across 23 functional areas with significant work happening in the first 18
months only.

Pantaloon (from Kishore Biyanis Future Group) also selected Wipro for
delivering streamlined IT operations. As part of the deal scope, Wipro is
responsible for rolling out and managing the IT operations across all Pantaloon
outlets. Wipro is delivering comprehensive infrastructure management and
application support services, managed security services and data center hosting,
operations and management services. On the real estate front, Wipro was awarded
a 10-year contract worth Rs 132 crore from Mumbai-based realty player Lodha
Group.

For HP, the marquee deals of the year included the Himachal SWAN, Hyderabad
International Airport, Government of Karnataka e-procurement, reliance
Healthcare, United Insurance, Britannia, United Bank, Andhra Bank, Maharashtra
Education & Drugs Department, and Department of Customs amongst others. Under
the agreement with Britannia, HP will implement a comprehensive IT outsourcing
and transformation project and implement tailor-made solutions to align IT with
Britannias growth strategy, spawning its back office and front office
operations, production plants at multiple locations, supply chain management,
sales and marketing divisions and customer relationship management.

TCS primary focus has been on the government sector: other than continuing
with the path-breaking MCA project, the company bagged the end-to-end passport
processing project from the Government of India. It also signed a major IT
outsourcing project with BSNL in December 2007. Beyond the e-gov arena, TCS
bagged a $40 mn plus transformational engagement from New India Assurance for
implementing its core insurance platform across the latters 1,100 branch
network in the country. The turnkey engagement, spread over eight years, was the
first major engagement for TCS in the non-life insurance space. As part of the
deal, TCS is deploying and maintaining its insurance suite, TCS BaNCS Insurance.

The two HCL entities too emerged as important players in the market,
especially HCL Infosystems. There was a perceptible shift in strategy towards
systems integration. The fact that the pure services component of its system
integration revenues increased by 43% from last year speaks volumes about the
success of its strategy. HCL Info already had presence in telecom, e-gov, BFSI
and power, as far as the SI business goes. In addition to these, last year it
set up new practices in media & entertainment, retail, healthcare and
infrastructure.

Early in FY 08, the company won the implementation of a multi-crore project
of Punjab State Wide Area Network (PAWAN), along with some other big
infrastructure management projects for several ports and some of the newly
revamped airports. The acquisition of Natural Technologies was again a
significant collaboration to re-emphasize its SI focus in BFSI. Result: it won a
project for the MIS framework for backend operations from a leading bank in
India. Another one was for the rollout of a Financial Inclusion Pilot from a
leading Nationalized Bank of the country.

There were several projects during the year that involved the active
participation of both the group entitiesHCLI and HCLT. In the domestic
projects, HCLI led the way with back-end support from the latter, while the
reverse happened in case of the global deals. Therefore, while HCLI was handling
the entire IT management for Escorts, HCLT was running SAP at the back. Ditto
for the Haryana State Electricity Board: while HCLI deployed an innovative
billing model for Gurgaon on a SaaS MODEL, HCLT was running SAP at the back.

There was a strong focus on government from Tulip Telecom as well. Some big
ticket wins included the West Bengal and Assam SWAN projects (each valued at Rs
60 crore); the icing was the delivery of Project Adhaar, the Haryana SWAN that